David M. Levine and Triple J Partners, Inc.
Securities Exchange Act of 1934
Rel. No. 48760 / November 7, 2003
Admin. Proc. File No. 3-10816
In the Matter of the Application of DAVID M. LEVINE and TRIPLE J PARTNERS, INC. For Review of Disciplinary Action Taken by the NEW YORK STOCK EXCHANGE, INC. |
ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY NATIONAL SECURITIES EXCHANGE
On the basis of the Commission's opinion issued this day, it is
ORDERED that the sanctions imposed by the New York Stock Exchange, Inc. against David M. Levine and Triple J Partners, Inc. be, and they hereby are, sustained.
By the Commission.
Jonathan G. Katz
Secretary
Endnotes
1 15 U.S.C § 78k(a) prohibits a member of a national securities exchange from effecting "any transaction on such exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion." 17 C.F.R. § 240.11a-1(a) provides that, "[n]o member of a national securities exchange, while on the floor of such exchange, shall initiate, directly or indirectly, any transaction in any security admitted to trading on such exchange, for any account in which such member has an interest . . . ."
2 Exchange Rule 352(c) provides that no member or member organization may, directly or indirectly, take or agree to take or receive a share in the profits or losses in any customer's account or of any transaction therein.
3 Exchange Rule 476(a) provides that members and their employees can be disciplined by the Exchange for conduct inconsistent with just and equitable principles of trade, acts detrimental to the interest or welfare of the Exchange as well as, among other things, for violating any provision of the Securities Exchange Act of 1934 or Exchange Act rules, violating any rule of the Exchange, and making a material misstatement to the Exchange.
4 Exchange Rule 117.10 provides that,
When a member keeps a [written] order in his possession and leaves the Crowd in which dealings in the security are conducted, he is not entitled during his absence to have any bid, offer or transaction made in such security on his behalf or to have dealings in the security held up until he is summoned to the Crowd.
5 Exchange Rule 132.40 provides that a member who effects a transaction on the floor must "promptly upon effecting the transaction, notify: the appropriate Exchange official of the member's broker badge number" and supply the "executing broker badge number . . . in regard to its side of the contract," to "the clearing member organization for his side of the transaction for submission by such clearing member organization."
6 Exchange Rule 123A.20 provides "members and member organizations must not transmit to specialists any orders except written market or limited price orders."
7 Exchange Rule 342 provides that,
[e]ach office, department or business of a member or member organization shall be under the supervision and control of the member or member organization, . . . and [t]he person in charge of a group of employees shall reasonably discharge his duties and obligations in connection with supervision and control of those activities of those employees related to the business of their employer and compliance with securities laws and regulations.
8 Exchange Act Rule 17a-3 requires members of national securities exchanges, brokers, and dealers to make and keep current records relating to their business, containing, among other things, an itemized daily record of all sales and purchases, showing the account for which each transaction was effected. Exchange Act Rule 17a-4 requires members, brokers, and dealers to preserve the records for a period of six years.
Exchange Rule 440 requires every member organization to make and preserve records as prescribed by the Exchange and Exchange Act Rules 17a-3 and 17a-4.
9 Exchange Rule 319 requires member organizations to carry fidelity bonds in such forms and in such amounts as the Exchange requires.
Exchange Rule 345 prohibits a member or member organization from permitting any natural person not registered with, qualified by, and acceptable to the Exchange, to perform regularly the duties performed by a registered representative, a securities lending representative, a securities trader, or direct supervisor of any of these.
Exchange Rule 382 requires that all agreements between a member or a member organization and any non-member organization relating to the carrying of customer accounts on an omnibus or fully disclosed basis, shall be approved bythe Exchange prior to becoming effective. These agreements must address, among other things, acceptance of orders and execution of transactions.
Exchange Rule 401 requires every member and member organization to adhere to the principles of good business practice in the conduct of his or its business affairs.
Exchange Rule 405 requires a member organization and its general partner or principal executive officer to use due diligence to learn essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization.
10 On May 30, 2000, Levine's lease terminated and he ceased being a lessee member of the Exchange. The same day, Triple J ceased being an Exchange member organization. Levine is currently employed as a floor broker with a broker-dealer firm.
11 In late October 1997, Tribeca transferred its account to Spear, Leeds & Kellogg, where it remained through February 1998.
12 Sometimes Shanahan or Reilly picked up the PGT List from Triple J's booth. At other times, one of Triple J's clerks brought the PGT List to Shanahan's post.
13 The PGT List included orders for more than one of Applicants' customers. With the exception of Tribeca, the record does not identify the Triple J customers that received executions from the PGT List. The record identifies only the clearing firms.
14 Applicants assert that Larkin's testimony should be discounted because he could not recall the specific date this event occurred. However, Larkin's testimony is corroborated by his report of these events to his supervisor and Shanahan's subsequent removal from the floor.
15 Shanahan was found guilty of violating various Exchange rules and federal securities laws in connection with his improper allocation of PGT executions to Applicants, among other violations. Shanahan was censured, received a plenary suspension of three months, was suspended from working as a specialist for three years, and fined $50,000. See William L. Shanahan, NYSE Case No. 97-119 (Sept. 9, 1997).
16 Applicants suggest that one reason for over-payment may have been to make up for earlier unpaid commissions. However, in January 1996, Tribeca had paid Applicants over $80,000.
17 In addition to the amount Applicants received, Levine and Exchange staff testified that Tribeca had authorized payments to Applicants amounting to $75,000 for work performed in February 1998. According to the stated billing rate, Applicants were entitled to receive only one-third of this amount, approximately $25,000. At the time of the hearing before the Exchange, Levine had not received any of the $75,000.
18 The Exchange was unable to compute profit and loss figures for the Tribeca account. See text accompanying note 39 infra.
19 In August 1996, Miller received approximately $25,000 from Tribeca for executing approximately 300,000 to 350,000 shares. This payment would equal a commission rate of approximately $12 per hundred shares. Miller testified that he received a comparable amount in September.
20 Miller's executions for Tribeca resulted in losses in November and December. Miller was paid nothing for those months. Barry complained that Miller was not "protecting" Tribeca's business, and claimed that Miller owed Tribeca money because of the losses. Miller refused to pay money to Tribeca and dropped Tribeca as a client.
21 Credibility determinations of an initial fact-finder are entitled to considerable weight and deference, since they are based on hearing the witnesses' testimony and observing their demeanor. Brian A. Schmidt, Exchange Act Rel. No. 45330 (Jan. 24, 2002), 76 SEC Docket 2255, 2258 n.5 (citations omitted).
The Hearing Panel also observed:
To accept Mr. Levine's denials of these facts, the Hearing Panel would have to believe that Mr. Levine accepted the customer's gross overpayments without clear knowledge of the reasons for such overpayments; that he similarly tolerated a long period of non-payment; that he never explained to a broker to whom he had introduced the customer that the customer paid on the basis of profits; that he did not recognize that the public customer was entering orders directly to the booth even though he was in frequent contact with the customer; and that he did not know that his clerks gave daily lists to a specialist, through which he received favorable executions, often while not in the crowd.
22 The Exchange charged Applicants with violations of Exchange Rules 345, 319, 342, 382, 405, 401, and 476. Exchange Rule 345 prohibits Exchange members and member organizations from accepting public customer orders without proper registration and approval. Rule 319 requires members and member organizations doing business with the public to carry fidelity bonds as determined necessary by the Exchange. Rule 342 requires members and member organizations to reasonably supervise and control the activities of their employees. Rule 382 requires approval by the Exchange of all agreements between members or member organizations and any nonmember, relating to the carrying of assets. Rule 405 requires member organizations, through a partner or principal, to use due diligence to learn essential facts relative to every customer. Rule 401 requires every member to adhere to good business practices in the conduct of his or its affairs. Rules 401 and 476 provide that members and their employees can be disciplined by the Exchange for violating any rule of the Exchange or for conduct that is "inconsistent with just and equitable principles of trade."
23 Applicants claim that OG, not Triple J, was responsible for performing the due diligence to determine Tribeca's status. Rule 405 requires all member organizations to "use due diligence to learn the essential facts relative to everycustomer [and] every order . . . accepted . . . by such organization" (emphasis added). Since Tribeca was placing its orders directly through Applicants, Triple J, acting through Levine, had an independent obligation to ascertain Tribeca's status. The fact that OG also had such an obligation does not insulate Triple J from liability for its own acts and omissions.
24 Exchange Rule 123A.20.
25 Exchange Rule 342.
26 Although, except for OG, the PGT List contained numbers of shares, prices and the clearing firms responsible for the trade, there were no specific time-stamped orders. Reilly stated that he did not place any of the listings in the specialist's book because they were not "orders."
27 Exchange Rule 13 defines "market orders" and "limit orders" as follows:
Market Order
An order to buy or sell a stated amount of a security at the most advantageous price obtainable after the order is represented in the Trading Crowd.
Limit, Limited Order or Limited Price Order
An order to buy or sell a stated amount of a security at a specified price, or at a better price, if obtainable after the order is represented in the Trading Crowd.
28 Exchange Rule 401.
29 Exchange Rule 117.10.
30 Exchange Rule 476.
31 Exchange Rule 132.
32 For example, if the market is at 7-1/2, and a broker bids 7-5/8, that broker is entitled to priority to execute the trade. After the execution, any broker in the crowd is on "parity" and may, depending on the availability of shares, execute a transaction at 7-5/8 until the next trade.
33 See Exchange Rule 117.10.
34 Id.
35 Levine testified that he really did not know when PGT trades took place, or where he was at the time, and that he only learned of executions after the fact. In apparent contradiction, Levine also testified that he always had a written order when Applicants received an execution, and that he was always in the trading crowd, or at least within "eyesight" or "earshot."
36 Applicants also assert that Exchange staff found no discrepancies between Levine's order tickets and the Exchange's audit trail. This, Applicants claim, evidences that Levine was in the trading crowd.
It is not surprising that these two sets of documents would match. Reilly testified that each time he executed a trade from the PGT List he informed Triple J's booth. Neither Levine nor his clerks ever refused an execution from the PGT List.
37 For the full twenty-six month relevant period, Tribeca paid Applicants a total of approximately $333,000 more than their quoted billing rates. In addition, for the period January 25, 1998 through February 24, 1998, Applicants billed Tribeca $25,275. However, Tribeca authorized Applicants to receive $75,000. This payment had not been made by the time of the Exchange hearing, although Levine testified that he still expected to receive these funds.
38 Edward John McCarthy, Exchange Act Rel. No. 48554 (Sept. 26, 2003), SEC Docket ; John R. D'Alessio, Exchange Act Rel. No. 47627 (Apr. 3, 2003), 79 SEC Docket 3627, 3637, quoting New York Stock Exchange, Inc., Exchange Act Rel. No. 41574 (June 29, 1999), 70 SEC Docket 153, 156.
39 The Exchange staff also attempted to calculate profits and losses from Spear, Leeds & Kellogg's records for the Tribeca account after it was transferred to that firm - a period from October 1997 to February 1998. However, in this four-month period, Applicants did not receive any payments for two of those months.
The Exchange staff, therefore, stated that they believed the sample was too small to conclude that Applicants had an interest in the Tribeca account during those four months. Contrary to Applicant's contentions, this determination does not preclude the conclusion that Applicants shared profits and losses in the Tribeca account for the preceding period.
40 Applicants assert that they were restricted in their ability to call Barry as a witness. Barry refused to appear unless the Exchange staff agreed to limit its cross-examination. The staff objected to this limitation. The panel informed Applicants that they would draw an adverse inference from the questions Barry declined to answer, and Applicants determined not to call Barry as a witness. We believe that the panel's ruling was reasonable. Applicants made the strategic decision not to call Barry.
41 Jonathan Feins, Exchange Act Rel. No. 41943 (Sept. 29, 1999), 70 SEC Docket 2116, 2128.
42 Applicants contend that the evidentiary standard should be clear and convincing evidence. The United States Court of Appeals for the District of Columbia has held that a preponderance of the evidence is the appropriate standardfor a self-regulatory organization disciplinary action. Seaton v. SEC, 670 F.2d 309, 311 (D.C. Cir. 1982)(upholding preponderance of evidence standard in NASD disciplinary proceeding). See also Steadman v. SEC, 450 U.S. 91, 102 (1981)(upholding preponderance of evidence standard in Commission enforcement proceedings alleging antifraud violations); Jonathan Feins, 70 SEC Docket at 2127-28 (upholding preponderance of evidence standard in an AMEX proceeding).
43 See Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2). Applicants do not claim, and the record does not show, that the Exchange's action imposed an undue burden on competition.
44 Butz v. Glover Livestock Comm. Co., 411 U.S. 182, 187 (1973); Jonathan Feins, 70 SEC Docket at 2131 & n. 36.
45 We have considered all of the arguments advanced by the parties. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed in this opinion.